Look For Comparable Store Sales & Guidance Figures In Chipotle’s Q2 Earnings Report

Investors’ confidence in Chipotle Mexican Grill’s (NYSE:CMG) stock has been on a positive trend over the last two weeks, as CMG stock rose 9% from $607 to $661. Chipotle is scheduled to release its second quarter earnings report for the fiscal 2015 on July 21. ^[1] The strong rise in the stock just before the earnings report indicates that investors are expecting robust Q2 earnings, or probably, an EPS figure above the consensus estimate of $4.46 on $1.22 billion in revenue. ^[2]

In Q1 2015, Chipotle’s impressive comparable store sales growth of 10.4% was not enough to compete with the corresponding growth figure of 13.4% in Q1 2014. As a result, despite the strong financial result, Chipotle’s stock slipped more than 10% in seven days. (See: Chipotle Mexican Grill: Pork shortage slows down comparable sales growth) The most looked upon driver in the earnings call will be the company’s guidance for the whole fiscal year and for its future growth, as well as its comparable store sales growth.

We have a $669 price estimate for Chipotle, which is merely 1% above the current market price.

See Our Complete Analysis For Chipotle Mexican Grill

Price Hikes In San Francisco Area

In November 2014, it was decided to raise the minimum wage rate in San Francisco by nearly 14%. ^[3] As a result, on May 1, the minimum wage rose from $10.74/hour to $12.25/hour. According to the latest survey report by William Blair, Chipotle Mexican Grill responded to this minimum wage hike by jacking up the prices by 10.5% in its San Francisco restaurants. Furthermore, the company’s restaurants in other cities such as Chicago and Orlando also witnessed moderate (0.5% on average) price hikes. ^[4] It is estimated that the price hike might contribute 20 basis points growth to the comparable store sales. Considering the fact that the success of Chipotle’s business model is its high quality organic food offering, a nominal and competitive price hike in the menu items might go down well among the customers.

Moreover, Chipotle’s beef prices were raised by 14.4%. The hike might seem reasonable to some customers, given the fact that beef prices are expected to increase further in 2015. USDA estimates the beef production to decline in 2015, with less than 23.7 billion pounds of expected beef production. ^[5]

On the other hand, the minimum wage in cities such as Los Angeles and Seattle rose to $15 per hour. ^[6] It will be interesting to see how the company reacts in these cities. In Q2 2014, Chipotle’s strong revenue growth was credited to price hikes in its burritos segment. The combined effect of the recent price hikes might drive the average customer spend for the company for the remainder of the year, which, in turn, might provide a boost to the revenue growth. Trefis estimates the average spend per customer visit to rise to $13.70 in 2015.

Addition of Pork Supplier To Provide Relief

Comparable restaurant sales is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation. Chipotle’s stock, off lately, has been more susceptible and correlated to its comparable store sales figures. After the release of the Q1 2015 earnings report, there was a huge decline in the company’s stock despite a strong double digit comparable sales growth of 10.4%, primarily due to its comparison to last year’s Q1 comparable store sales figure of 13.4%. Investors were concerned with the company’s medium-term outlook. Looking at the trend, Q2 2015 will be facing even a stronger year-over-year comparison figure of 17.3%.

The important factor to notice is that first quarter’s comparable store sales showed sluggishness due to short-term pork supply constraints. One-third of the Chipotle’s restaurants were affected by the shortage of carnitas, as the company suspended one of its pork suppliers on claims of below standard animal welfare protocols. However, on July 11, 2015, Chipotle added a British pork supplier, Karro food, based in Malton, England. This will provide a relief to the company, who was struggling with a shortage of pork to be used in its Carnitas. ^[7] Chipotle expects to have the Carnitas back in all of its outlets before the end of this year.

Nonetheless, we can expect strong revenue growth this quarter as well, as the restaurant industry posted 1.8% comparable store sales growth in the second quarter. ^[8] On the other hand, customer count remains the topic of concern for the company, as industry-wide customer traffic declined 1.7% in the second-quarter.

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1. Chipotle Mexican Grill, Q2 earnings conference call [↩]
2. Chipotle Mexican Grill, Earnings estimates, yahoo finance [↩]
3. San Francisco, Minimum wage ordinance [↩]
4. Chipotle’s S.F. price jump mirrors minimum-wage hike [↩]
5. World Agriculture Supply and Demand Estimates, USDA July 2015 [↩]
6. Los Angeles is now largest city in America with $15 minimum wage [↩]
7. Chipotle adds British pork supplier to ease Carnitas shortage [↩]
8. Report: 2Q same-store sales rise despite shrinking traffic [↩]